(Kolkata’s Arun Mukherjee, a college dropout by choice, and Soumya Malani, a London School of Economics passout, have come to be known as smallcap aficionados in India’s investor community. They would show up at most AGMs, visit the remotest factories of a company and go chasing end-users to understand their experiences with a product in their passionate hunt for good smallcaps. Soumya and Arun would be sharing their experiences with companies and from the ground in this space every now and then. Keep watching.. )

We like how the high quality NBFCs have positioned themselves. There are a lot of disruptions taking place in the banking sector, but still we feel NBFCs would have an upper hand. Empirical evidence of the last few years proves the point. Many NBFCs have doubled their balance sheet sizes, whereas majority of the banks either did nothing or got entangled in mess.

Unlike banks, NBFCs are insulated from the vagaries of farm loan waivers and priority lending. The NBFC sector in India, which serves a genuine need, has undergone a significant transformation over the past few years.

Projects like ‘Make in India’ and the boom in startups are offering huge opportunities. In fact, they remain a good proxy to bet on the new, agile India. Credit access in our country is vastly under-penetrated, and businesses need constant capital to grow. NBFCs with use of technology and innovation, wide reach, customised products, smart credit underwriting and strong risk management capabilities have been able to control bad debts. With better understanding of clients, they have created clusters and niches which would be impossible for the banks to replicate or cater to.

Though their cost of funding is higher than that of banks, a decent spread and lower cost of operations can do the job for them. With low bases, many of them could grow 30-40 per cent CAGR in the coming 5-7 years. NBFCs have, so far, achieved a tremendous feat by meeting their massive short-term /commercial paper obligations in this quarter. They have weathered many storms in the past (since the 2008 global financial crisis to demonetisation in late 2016) and seems to have almost overcome the current liquidity crisis as well.

We recently had an interaction with someone senior working with Piramal Enterprises.

His views: “Around October, during the peak of the credit crisis, commercial papers worth some Rs 2,60,000 crore were scheduled to mature/roll over during the quarter. Currently, this stands at less than Rs 45,000 crore. This has been achieved without any default or downgrades so far.”

This is a testament to how strongly they have evolved over the recent years. The next decade could well belong to them and their shareholders. Make sure you stick to quality, backed by a proven pedigree with an exceptional past track record.

(Mukherjee and Malani are Kolkata-based Sebi-registered investment advisers. Views are their own)

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)